Will blockchain technology revolutionize the future or just be a flash in the pan?

With the invention of Bitcoin, the field of financial technology (Fintech) has ushered in a new technological darling - blockchain technology.

The technology behind Bitcoin has found a new niche in the financial industry. As data regulation challenges plague banks and other financial institutions, decentralized blockchain technology seems to offer hope for a solution. The technology allows businesses to implement and verify instant transactions without the need for any middleman.

The blockchain alliance convened by the startup R3 CEV, which was established in early September last year, has attracted the participation of 43 major international banks in just a few months. Supporters of the technology say that this ledger technology brings a safe and transparent transaction method, and can also digitally track asset owners, speed up transactions and reduce expenses, while reducing the risk of fraud. The technology brings high transparency, high security and high efficiency after decentralization to financial transactions.

According to the Wall Street Journal, the traditional form of clearing system is a unified account book update and verification by a third party (bank or other financial institution). But blockchain essentially solves the problem of traditional reliance on third parties. Blockchain technology allows consumers and suppliers to connect directly, complete automatic settlement, form an online network, eliminate the need for middlemen, and achieve decentralization. In short, blockchain technology is a technology that collectively maintains a reliable database in a decentralized and trustless manner.

Many financial institutions have begun to research and develop how to apply blockchain technology. According to statistics from Bitcoin Market Capitalization, the highest market value of blockchain technology reached US$6.9 billion in 2015.

Citi stated in its "2016 Investment Theme Report": Blockchain technology will not lead to financial disintermediation (that is, financial decentralization), but blockchain technology will greatly benefit the financial industry, such as improving the level of transaction automation and reducing operating costs. Transaction verifiers will continuously check transactions and update classified ledgers, and financial assets can be transferred instantly, thereby improving settlement efficiency; transaction information in the blockchain can also be disclosed to all participants in the network, bringing greater transparency and security to transactions; ensuring seamless and automated transactions of electronic assets, bringing innovation to secure settlement, payment, identity management, accounting insurance and the Internet of Things; and reducing the operating costs of syndicated loans.

However, while the report affirms the potential development of this technology, it also points out that financial institutions are overly enthusiastic about the technology and that blockchain technology still faces practical challenges, such as the need to establish legal currency suitable for blockchain.

Rupert Hackett of buyabitcoin.com.au said that the application of Bitcoin creates a decentralized trust, which is the main asset of banks; banks are enthusiastic about blockchain because they see it as a way to solve the competitive threat of Bitcoin to traditional currencies. Banks and governments regulate traditional currencies, and they now realize that even if they are out of the control of governments or banks, Bitcoin (CryptoCurrency) can still safely and effectively produce and manage currency.

Citigroup's report believes that blockchain will not lead to financial disintermediation and traditional banks will not lose their central position. The reasons are: first, banks have a large identifiable customer base, which is a very valuable asset. Second, banks have high credibility. Third, banks' experience in dealing with complex financial rules is irreplaceable. Fourth, the amount of capital that banks can obtain far exceeds the amount of capital currently supported by blockchain technology.

However, blockchain technology will improve the transaction types with complicated operation procedures such as syndicated loans. Blythe Masters, one of the blockchain promoters and the creator of credit default swaps, once said, "If blockchain technology can really be used, it will greatly shorten the time to reach a final transaction. For example, for syndicated loans, it can be reduced from the original 20 days to the current 10 minutes. At the same time, the risk will be greatly reduced, and assets can enter the market quickly."

In June last year, Spain's Santander Bank (SANTANDER CENTRAL) proposed in a research report that by 2022, blockchain technology could save the banking industry $15 billion to $20 billion each year by reducing costs in cross-border payments, securities trading and compliance.

However, Huaqi believes that the forecast overestimates blockchain technology. Blockchain still faces many challenges in its popularization in real life. These challenges include: integrating blockchain technology with traditional systems will bring huge cost challenges to banks; the financial industry must work together and establish industry standards for the technology to be fully utilized; as a new technology, blockchain may face legal and regulatory risks; the security control of private keys and the protection of privacy, these issues that test the feasibility of blockchain will determine whether the technology can be widely popularized.

In addition, the biggest challenge facing this technology is the need to establish a fiat currency that can be applied to it, and this requires a consensus in the financial industry. The most acceptable solution is for a trustworthy regulator to issue a cash-backed substitute currency. Only substitute currencies issued by banks can ensure cash support and high credibility. Substitute currencies issued by users cannot meet the requirements of the entire financial market for liquidity and transaction scale; it takes too much time for the government to issue substitute currencies, and currency issuance cannot be achieved in the short term. Therefore, the most reliable solution is for banks to complete it.

Text/ Shi Meng